USD: Markets pivot as geopolitical tensions ease
The US dollar index keeps pulling back as investors lean into the classic de-escalation trade after the ceasefire was confirmed. In just a week, the greenback has given back nearly all its March gains, suggesting the conflict premium is fading fast. Positioning is shifting out of safe havens and back into growth-heavy sectors and emerging markets. As diplomatic channels reopen and gather momentum, the initial shock is giving way to cautious optimism around a more durable peace outcome.
Volatility has cooled sharply, with the VIX at its lowest level since late February. While the blockade in the Persian Gulf remains a risk, major equity indices have already recouped their war-related losses. Crude is also easing from March’s spike, staying below $100 as traders price in improved shipping capacity. Oil remains elevated, but progress on restoring key pipelines, and the prospect of fewer shipping disruptions, suggests the worst of the supply fears may be starting to ease.
Energy markets got another tailwind after the US Treasury issued licenses allowing certain Lukoil-related transactions outside Russia. That helped take the edge off global supply concerns and pushed WTI down toward $93. Investors are watching closely for signs of normalization in trade flows, and this added flexibility helps relieve some of the pressure. Shipping-lane leverage still matters, but the market narrative is increasingly shifting from escalation to diplomacy.
Finally, March Producer Price Index data came in below expectations across the major categories. A few components, including airfares and medical costs, remain sticky, but the broader cooling supports the near-term macro outlook.
EUR: Up seven days straight
FX markets appear more sensitive to signs of peace than signs of escalation in the Middle East. Even tentative progress toward de-escalation is enough to lift high beta, energy importing currencies like the euro. With oil drifting lower and risk appetite improving, EUR/USD has room to extend its recovery, provided geopolitical calm holds. Hopes that the US and Iran will return to talks, and any deal that reopens the Strait of Hormuz, would likely lift EUR/USD above 1.20 amid further unwinding of geopolitical risk premia.
That erosion is already visible. The dollar has now weakened against both the euro and sterling to levels below those prevailing before the conflict began in late February, signalling that the market no longer treats the war as a durable source of USD support. Safe‑haven demand has faded rather than rebuilt as the conflict has evolved.
Recent price action reflects this shift. EUR/USD’s move above 1.18 yesterday occurred alongside growing confidence that Washington and Tehran are progressing, unevenly but directionally, toward a negotiated outcome. Markets appear increasingly willing to look through sporadic setbacks and focus on the broader trajectory toward containment. EUR/USD has risen for seven days straight and now holds well above key daily moving averages in a sign of technical resilience.
Energy dynamics remain central. A reopening of Hormuz would ease supply risks and help stabilise oil and gas markets, but the earlier price shock has likely already fed through to inflation expectations. As a result, the ECB still faces pressure to lean hawkish relative to the Fed, where further tightening remains unlikely. That asymmetry in policy paths, combined with fading USD war premium, leaves EUR/USD supported – though still conditional on energy stability rather than structural euro strength.
GBP: Sterling rally faces macro reality
Sterling extended its advance for a seventh consecutive session against the dollar yesterday, as hopes grow that the US and Iran are opting for diplomacy over escalation. This marks the pair’s longest winning streak since the “Liberation Day” USD sell-off. The risk-on move has been driven by sterling’s high-beta characteristics, the trimming of heavily crowded GBP/USD short positions, and a compression in the USD’s safe-haven premium. Expectations that the Bank of England will require greater conviction before cutting rates further this year have also provided incremental support. We expect the bullish impetus to wane a bit today as markets begin to demand for more clarity that negotiations are heading in the right direction.
The divergence in market pricing between the two central banks – both still in moderately restrictive territory and on easing paths (at least before the conflict) – is illustrative: markets currently price around 34bp of tightening by year-end for the BoE, versus roughly 10bp of cuts for the Fed.
That said, we see growing risks that softening sterling sentiment could begin to work against an otherwise supportive rates environment. UK economic momentum that fails to gain traction risks undermining the credibility of sustained Bank of England hawkishness, particularly against the backdrop of ongoing political uncertainty and tight fiscal manoeuvre. In contrast, USD softness linked to sentiment remains, in our view, more selectively driven by episodic factors – such as Trump’s erratic policy agenda – and is therefore likely to prove more transient. Underlying US economic resilience should shield the dollar from conflict-related growth drag.
As a result, while we see 1.36 as a near-term upside target, the pair may struggle to break and sustain the January–February highs in the 1.37–1.38 range as the risk-on impulse fades. Initial “tough talk” from both central banks could compress sterling’s relative yield advantage, while a softer macro backdrop may blur the clean transmission from rates into sterling further out. A move back below 1.36 remains our medium-term base case.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: April 13-17
All times are in BST
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
